The Nasdaq and S&P 500 experienced their worst single-day decline since 2022, following underwhelming financial results from Tesla and Alphabet, the parent company of Google. This sell-off has raised concerns about the high valuations of certain tech giants and the potential vulnerability of the wider US market to their performance.
The so-called “magnificent seven” of high-performing tech stocks – Microsoft, Amazon, Google Parent (Alphabet), Tesla, Facebook (now known as Meta), Nvidia, and Apple – all lost value during Wednesday’s trading. This collective decline marks the worst day for these companies since Meta went public over a decade ago.
Nvidia, a major benefactor of the AI boom, was the biggest drag on the S&P 500, with its stocks struggling to recover amid fears of trade tensions escalating between the US and China and Taiwan, where the majority of the world’s microchips are produced.
While factors such as the US presidential race, inflation projections, and interest rates are weighing heavily on the stock market, Silicon Valley is facing pressure to demonstrate returns from their significant investments into developing artificial intelligence technology.
Despite delivering better-than-expected profits, Alphabet saw a 5% drop in shares, as analysts expressed concerns about rising AI investments and other expenses potentially impacting earnings. Ipek Ozkardeskaya, senior analyst at Swissquote Bank, stated that the market reaction to Google’s earnings – which were a beat, by the way – suggests that investors are growing increasingly impatient to see returns on their massive spending, while these companies continue to argue for more spending before reaping the benefits.
Ozkardeskaya also noted that the growing expectations for a rate cut by the Federal Reserve are not favorable for Big Tech stocks, as they were previously considered a safe haven when interest rates were high. This could result in a sector rotation, with investors turning to companies with smaller valuations.
The size of these tech giants has reached a point where not everyone believes their growth is sustainable. As reported by Sky News, Citigroup analysts have advised investors to diversify their portfolio and invest in a broader range of stocks to mitigate risk.
All eyes are now on the remaining big tech companies – Meta, Amazon, and Apple – who are expected to reassure investors when they report their earnings next week.
